Bribing the children of DC with cookies and milk
Editor's note: Combining his passions for the markets, humor and food, "What's cookin' with Kenny Polcari" is a blog published twice weekly on CNBC.com. With more than 30 years of experience on Wall Street, Polcari provides insight and analysis on the markets, as well as a recipe du jour. Buon appetito!
Wow, where to begin? Let's start with Negotiating Rules 101, straight out of the "Mommy Handbook." The first lesson is on bribing the children. If you clean up your room, Mommy will give you a cookie. If you clean up your room and put on your PJs, then you get a cookie and a glass of milk. And if you clean up your room, put on your PJs and brush your teeth, Mommy will give you two cookies and a glass of milk. Do you see where this is going?
Check out Thursday's Wall Street Journal with the front-page headline "Shutdown Standoff Shows Signs of a Thaw" and a picture of Rep. Paul Ryan, (R-Wis.) as he outlined a "plan" for congressional Republicans to "save face": We extend the debt ceiling by four to six weeks as long as we "talk" about deficit reduction, and the greater the reduction talks, the longer we extend the debt ceiling the next time, and so on and so forth.
Can you just hear President Barack Obama breaking into his best impression of Barbara Streisand singing "Send in the Clowns?"
You can't make this stuff up. Who would believe it? Well folks, start believing. Stocks traded higher Thursday on the belief that someone has finally come to his senses. (I suppose we should all be thanking the senior Mrs. Ryan and mothers everywhere for their keen insight into high-level negotiating tactics.)
Thursday's markets will likely be dominated by this breakthrough, as any indication of a deal will clearly produce a "relief rally." That, coupled with the Janet Yellen appointment as Federal Reserve chair, and all is good in the world once again. You see, Yellen is viewed as a dove and will surely maintain the easy money policies of current Chairman Ben Bernanke, and that means more stimulus, allowing equities to blaze a trail to even higher highs—only making a withdrawal that much more concerning.
But, hey, not to worry. We just kicked that can down the road for at least four to six months so we can worry about it then. The march is on, and as long as legislators get their $#*! together, then the world is your oyster! Did someone say "Santa Claus?"
Technically, the selloff of the past week or so appeared to be nearing exhaustion. The move lower was caused by fear and anxiety, but it also allowed for some of the "fluff" to be taken out of the market ahead of third-quarter earnings. A relief rally brought to us courtesy of legislators may be welcome, but are we really out of the woods? Earnings season now will kick into high gear, and investors are waiting patiently for the results.
If the government shutdown shows signs of lifting and we get back to work, those government reports will get published, bombarding the market and the Fed with data, causing some confusion (chaos) as investors and traders assimilate the macro and micro (earnings) and the congressional data. Expect the smart algo's to implode as the headlines go from worried to excited to cautious to enthusiastic, causing slingshot action in the days ahead.
Listen, the point is that the pullback is not unusual based solely on price. Looking at the McClellan Oscillator, It looks like just another pullback and as in previous corrections it dropped back into oversold territory, where "technical buyers" and longer-term asset managers go bargain shopping.
The Dow 30 fell Wednesday to its 200-day moving average, with the S&P holding firmly above its 200-day moving average and the Nasdaq falling to its lowest level in over a month, becoming the weakest link and adding concern about further downside. But the Dow found support at 14,728, giving traders a reason to "take a shot" land providing fuel for a small rebound, which has now turned into a bigger one because of the Ryan plan.
Up until now we have been completely blind entering earnings season, with no macroeconomic data forthcoming during the shutdown. Assuming that some agreement is reached and the government "opens," expect the rally to return us to 1,670 before pausing as investors assess the data and the future guidance offered by corporate CEOs and chief financial officers.
And now from the kitchen of Kenny Polcari, here's the recipe of the day!
Oreos and milk
Enough said. Enjoy.
—By Kenny Polcari, director of NYSE floor operations, O'Neil Securities and CNBC contributor, often appearing on "Power Lunch." The author is not compensated by CNBC for this or any other written materials found on CNBC.com.
About Kenny: Kenny has more than 30 years of experience on Wall Street. Currently director of NYSE floor operations on behalf of O'Neil Securities, he has also worked for Icap and Salomon Brothers. You can follow Kenny on Twitter @kennypolcari and visit him at kennypolcari.com.
Disclosure: The market commentary is the opinion of the author and is based on decades of industry and market experience; however no guarantee is made or implied with respect to these opinions. This commentary is not nor is it intended to be relied upon as authoritative or taken in substitution for the exercise of judgment. The comments noted herein should not be construed as an offer to sell or the solicitation of an offer to buy or sell any financial product, or an official statement or endorsement of O'Neil Securities or its affiliates.